overcoming distances via syndication with local friends: the case of venture capital tereza tykvová...

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Overcoming Distances via Syndication with Local Friends:

The Case of Venture Capital

Tereza Tykvová

(joint work with Andrea Schertler)

EFM Symposium Montreal

April 16, 2010

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“Venture capital is not about the people you know but rather where

you are: FIBRE networks cross the world. Data bits move at light

speed. The globe has been flattened, and national boundaries

obliterated. Yet…physical distance is very much on the minds of the

investors who provide venture capital.”

“ … if a start-up company seeking venture capital is not within a 20-

minute drive of the venture firm’s offices, it will not be funded. ”

Source: Stross, Randall, “It’s not the people you know. It’s where you are.” The New York Times, 22 October 2006.

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BUT:

“VCs who once bragged about never driving more than half an hour to

visit a portfolio company are jetting to Australia for optical engineers,

Israel for security whizzes, India and Kazakhstan for brute software

coding, South Korea for online gaming, and Japan for graphics chips.

For growth across the board, China is the place to go.”

“VCs in Silicon Valley used to pride themselves on being local… That

was well and good when the U.S. was the mecca for technology.”

Source: The Global Startup, Forbes Global, 29 November 2004.

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Research questions (I)

1) Does geographical and institutional distance matter in VC

internationalization?

2) Do experienced VCs cross borders while inexperienced VCs stay at

home?

3) Do foreign VCs overcome distances by teaming up with local VCs?

BUT: Information asymmetries among syndicate members (Casamatta and

Haritchabalet JFI 2007, Cestone, Lerner and White 2009 WP)

Questions and literature

SummaryTransaction data

Participation model

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Research questions (II)

4) Do repeated relationships help overcome distances? Repeated

relationships are supposed to reduce information asymmetries (Pichler and

Wilhelm JF 2001, Hochberg, Ljungqvist and Lu JF 2007)

5) Are repeated relationships more helpful when information

asymmetries are particularly pronounced?

6) Does the lead VC’s experience help overcome distances?



Participation model

Lead model

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Related literature on VC internationalization

- Recent interest in this topic

Where?

VCs (worldwide) invest into geographically and institutionally proximate countries (Aizenman/Kendall NBER 2008).

Who?

VCs (from US) with a larger international experience (Guler/Guillén JIBS 2010) and with stronger home-country networks (Guler/Guillén AMJ 2010) expand faster into new foreign countries.

How?

PEs (from UK) with int. experience (and experience in host countries) are less likely to team up with a local PE in cont. Europe (Meuleman/Wright JBV 2010).

Our analysis combines the where, who and how in a single framework.

Our analysis uses an extensive dataset of worldwide deals.



Participation model

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Worldwide venture capital transaction data 2000-2008 (Zephyr)

Portfolio firms

- Name, industry and location (city and ZIP code).

- Transaction size.

- Age (Amadeus, Orbis).

Venture capitalists

- Name and location (city and ZIP code).

- Business description of all VCs in each transaction.



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Worldwide venture capital links

Total links (2000-2008), Source: Zephyr



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Model set-up

Combination of all cb transactions with all potential cb VCs

Dependent variable (binary):

One if the potential VC participates in the transaction, zero otherwise.

Estimation method: Conditional logit model with transaction FE.

Selected RHS variables (t … time varying; past three years): – Potential VC – firm: Geographical distance – Firm: Fixed effects, presence of a domestic VC (dummy interacted

with distance); age and volume in extensions– Potential VC: Experience (t), location (country dummies) – Potential VC – firm country: Joint border (dummy), same law

tradition (dummy), newcomer (dummy, t)– Potential VC – participating domestic VCs: Repeated relationship

(dummy, t)



Participation model

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Does distance matter? Does a local VC help?

Geographical and institutional distances matter.

Marginal effects of geographical and institutional distances as well as

joint border are smaller if a local VC participates. Teaming up with local VCs helps.

Cross-border transactions

All DD=0 DD=1

Distance+distanceDD -0.003*** -0.004*** -0.002***Same law 0.005*** 0.008*** 0.003***Joint border 0.001* 0.002* 0.001**Repeated rel. to dom VC 0.033***

Newcomer -0.052***

Experience 0.005***

Pseudo R2 0.2562

Marginal effects; 4,457,121 observations; model includes transaction-FE, and VC-country dummies, *** (**) significant at 1% (5%).



Participation model

Lead model

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Do repeated relationship matter? Does experience matter?

Repeated relationships help.

Experience and country experience help.

Marginal effect of foreign VC’s experience is higher if no local VC

participates.

Cross-border transactions

All DD=0 DD=1

Distance+distanceDD -0.003***

Same law 0.005***

Joint border 0.001*

Repeated rel. to dom VC 0.033***

Newcomer -0.052***

Experience 0.005*** 0.008*** 0.003***Pseudo R2 0.2562

Marginal effects; 4,457,121 observations; model includes transaction-FE, and VC-country dummies, *** (**) significant at 1% (5%).



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Are repeated relationships more important if information asymmetries

are more pronounced?

Repeated relationships to domestic VCs are more important if the

portfolio company is young.



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Model set-up

Combination of dom and cb syndicated transactions with all potent. VCs

Model for potential synd. partners (exclude lead VC)

Dependent variable:

Dummy equals one if the potential VC participates in the given

transaction, zero otherwise.

Estimation method: Conditional logit model with transaction FE.

Selected RHS variables: – Potential VC – firm: Geographical distance– Potential VC – lead VCs: Repeated relationship (dummy, t) – Lead VC: Experience (t); interacted with the distance between the

potential VC and the firm.– Potential VC – firm country: Newcomer vs. old hand (dummy, t)



Participation model

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Does the lead VC’s experience help overcome distances?

Marginal effect of distance is negative only if the lead VC is

inexperienced. Lead VC experience helps.

Syndicated transactions

All Inexp lead Exp lead

Old hands

Distance+distanceLeadExp

-0.005*** -0.015*** -0.001

Same law 0.065***

Newcomer -0.389***

Old hand -0.068***

Experience 0.068***

Repeated rel. to lead VC 0.5094***

Pseudo R2 0.2762 Marginal effects; 9,536,664 observations; model includes transaction-FE and VC-country dummies, *** (**) significant at 1% (5%).



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- Geographical and institutional distances matter

- VCs overcome distances by:

- Accumulating experience (resp. country experience)

- Syndication

- with local VCs

- with experienced lead VCs

- Repeated relationships make such syndication easier

- more helpful when information asymmetries are high



Participation model

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Thank you for your attention!

overcoming distances via syndication with local friends: the case of venture capital tereza tykvová...

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